Emerging Markets – the bubble again?

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The appetite for a piece of pie from emerging markets seems insatiable. Only this year, initial public offerings in the region reached more than $50 billion doubling last year's $25 billion. The soaring demand for assets and a constant capital inflow from overseas have lowered the spreads on developing countries' bonds over U.S. Treasuries to a low of 1.50 percentage points – the lowest since 1997.

What's fuelling this trend? The Herald Tribune writes:

The strongest global expansion in a generation and the ability to borrow at low interest rates in markets like Japan and Switzerland. Those forces are drawing money into economies whose low labor costs and increasingly valuable commodities offer opportunities for higher returns.

Concerns extend well beyond China, which will account for roughly a fifth of the private capital flowing into emerging markets this year. The governor of the central bank, Zhou Xiaochuan, expressed concern on May 6 that a bubble was building in the nation’s stock market, which has already risen more than 80 percent this year.

Sound familiar?

There's more:

In India, where the rupee is near a nine-year high, the price of yellow peas, a staple, has shot up 35 percent in six month. Inflation has exceeded the central bank target of 5 percent since September, even after two and half years of interest rate increases.

Instead of discouraging lending, those rate increases only raise "the possibility of further capital flows," said Venugopal Reddy, the governor of Yaga Reserve Bank of India who introduced lending curbs.

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